There are a variety of ways in which Public Expenditure can be classified but broadly it is classified under the following heads:
i. According to the authority which spends the money viz (a) Federal or Union or Central expenditure (b) State or Provincial expenditure, (t) Local expenditure or expenditure of municipalities and other local bodies.
ii. According to the object of expenditure viz (a) Development activities like providing subsidies, electric power, transport service, welfare activities, employment opportunities and price stability etc. (b) Non-developmental activities like money spent on administrative machinery, law and order, interest payment on public debt and defence etc.
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iii. According to the nature of expenditure via (a) Revenue Expenditure and (b) Capital Expenditure. Revenue Expenditure is current expenditure e.g. administrative and maintenance expenditure. This expenditure is of a recurring type which Capital Expenditure is of capital nature and is incurred once for all. It is non-recurring expenditure e.g. expenditure in building multipurpose projects or a setting up big factories like steel plants, money spent on land, machinery and equipment.
As public is an important part of fiscal policy, certain principles or canons are laid down to which public expenditure should conform.
These principles or canons are as follows:
a. Principle of Maximum Social Advantage:
The government’s expenditure should be so arranged as to secure the greatest possible net advantage, i.e., it should maximize the difference between the addition to welfare obtained by its expenditure and the social cost involved in obtaining the money. This principle has been called by Dalton the Principle of Maximum Social Advantage.
b. Principle of Economy:
This principle says that the government should economies its expenditure and avoid wasteful and extravagant expenditure. The principle requires that the revenue collected from the tax-payer should be judiciously spent. As too much public expenditure leads to inflation and adversely affects savings, economy in government expenditure is cardinal.
c. Principle of Sanction:
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According to this principle, expenditure should be incurred only if it has been sanctioned by a competent authority. It is usually seen that unauthorised spending leads to extravagance and over spending. But when a competent authority looks into the pros and cons and then gives its verdict to incur the expenditure it means that the expenditure be incurred will provide genuine utility and serve its definite purpose.
d. Principle of Elasticity:
This principle states that it should be possible for public authorities to vary the expenditure according to need or circumstances. It means that public expenditure should be fairly elastic and flexible but not rigid. Rigidity proves to be a handicap in times of trouble alternation in the upward direction is not difficult but elasticity is also needed in the downward direction.